Tax — corporate taxes — income

Listen to this article

United States Court of Appeals For the Seventh Circuit

Civil

Tax — corporate taxes — income

The IRS correctly determined that an accounting firm organized as a corporation was underreporting corporate income when it paid its own shareholders consulting fees for providing accounting advice.

“There is no evidence that the ‘consulting fees’ were compensation for the founding shareholders’ accounting and consulting services. If they had been that—rather than appropriations of corporate income—why the need to conceal them? The firm did not treat them as labor expenses: it didn’t withhold payroll taxes on them, report them as employee compensation on its W-2s or as nonemployee compensation on its 1099-MISC forms, disclose them on the officers’ compensation schedule in its form 1120 corporate income tax returns, or keep records that matched the consulting fees to work performed by each founder. ‘When a person provides both capital and services to an enterprise over an extended period, it is most reasonable to suppose that a reasonable return is being provided for both aspects of the investment, and that a characterization of all fruits of the enterprise as salary is not a true representation of what is happening.’ 1 Bittker & Lokken, supra, ¶ 22.2.2, p. 22-26.”

Affirmed.

11-2105 Mulcahy, Pauritsch, Salvador & Co., Ltd., v. CIR

Appeal from the United States Tax Court, Posner, J.